It's official. Or sort of. There are "about" $9-trillion of over-the-counter derivative contracts outstanding in Canada, according to the Bank of Canada's best estimate

It’s official. Or sort of. There are “about” $9-trillion of over-the-counter derivative contracts outstanding in Canada, according to the Bank of Canada’s best estimate.

If that sounds like a big number consider that the total notional amount outstanding world wide at the end of last year was $618-trillion, meaning this country represents less than 2% of the global market.

Tiff Maclem, senior deputy govenor of the Bank of Canada, disclosed the figures in a speech on Monday to business leaders in Montreal in which he talked about the G20 initiative to move to bring transparency to OTC derivatives trading through the use of central counterparties.

Famously described by Warren Buffett as financial weapons of mass destruction, opaque derivatives such as credit default swaps were at the core of the financial crisis, causing much of the carnage on Wall Street.

In Canada, regulators were taken by surprise when they learned that a string of unregulated financial companies had entered into more than $100-billion of derivative trades used to support asset backed commercial paper. A $35-billion slice of the ABCP market froze up in 2007, leaving investors on the hook for massive losses. (The stalled paper was eventually restructured into medium-term notes some of which now trade for as much as 80% of par value.)

One of the problems in quantifying OTC trading is the lack of detailed information, because though most of the major players such as the banks are regulated, there are plenty of smaller ones that are not required to disclose their activities.

“Central counterparties for OTC derivatives will provide greater certainty of payment, mitigating the harmful spillovers resulting from the failure of a counterparty, and reducing contagion in times of stress,” Mr. Maclem said.

So far, there are two approaches to the problem of derivative regulation among major economies. Some countries are promoting fair and open access to global central counterparties which would be mostly based in major financial centres. Oversight would be shared regulators around the word. Mr. Maclem said the other approach is for individual jurisdictions to create and regulate their own central counterparties, a strategy being pushed by countries such as Brazil and South Korea.

Mr. Maclem said Canada should give “serious consideration” to the latter option.

Interestingly, nearly four years after the failure of the ABCP market Canada still has not revamped the rules around OTC derivatives trading to prevent a repeat of the collapse.